LUWEI XIONG explains the start-up craze that has taken root in China’s internet services industry.

Today, Xiaomi, a Chinese electronics company, launched its newest smartphone model, Mi Note 2. Founded six years ago in Beijing, Xiaomi now sits atop the Chinese cell phone market, competing with global companies like Apple and Samsung. Moreover, Xiaomi ranks number two after Uber on Fortune’s “Unicorn List,” a compilation of private companies valued at $1 billion or more.

Xiaomi is only one of the many entrepreneurial ventures founded in China that has prospered in recent years. In fact, nowadays, there are seven new companies established every minute in China. Not long ago, China was perceived as the “world’s factory,” producing and exporting cheap, mass-market products. But in recent years, due to the economic slowdown and new technological advances, the common saying “Made in China” has been replaced by “Innovated in China.” This leap in innovation reflects the confluence of several factors.

Consumption and Innovation

First of all, in China’s developing market, private consumption continues to grow rapidly: China is now reported as the world’s second largest consumer economy by The Economist. Thanks to local companies like Xiaomi and Huawei, smartphones are no longer a luxury, but readily available to the average Chinese consumer. Along with the proliferation of smartphones, Chinese people have sought new forms of communication, entertainment, and technology, stimulating development in the internet services industry.

The most famous of these internet service start-up companies is Alibaba, an e-commerce conglomerate founded in 1999, with a current market value greater than those of Amazon and eBay combined. Alibaba’s subsidiaries, most notably Taobao and Alipay, have grown rapidly in recent years. Users of Taobao, an online shopping website, spend on average 28 minutes per day in the Taobao phone app, longer than the time spent in-app by users of Facebook, Snapchat, and other popular social media platforms, according to Alibaba Group Vice Chairman Joseph Tsai.

As Chinese consumers have grown eager for more and better internet services, investors have rushed to seize the opportunity. In 2015, BBC reported that China had replaced the US as the top destination for direct foreign investment. However, what makes the Chinese start-up culture unique are the local investors. With a wealth of knowledge about Chinese culture and prior experience as accomplished entrepreneurs, this group of Chinese natives has played an important role in China’s start-up boom.

One such investor is Kaifu Lee, the former Vice President of Google Greater China and founder of Sinovation Ventures, a start-up incubator. Backed by over $32.2 millions capital and a team of leading strategists, Sinovation Ventures has helped along numerous start-ups in China including Zhihu, an online question-and-answer platform that has grown rapidly since its launch in 2011. Zhihu has nurtured its user community through novel and inventive strategies, like featuring high-profile Chinese academics and famous entrepreneurs.

Government: Regulator or Stimulant?

Although an infusion of private capital has sought to meet the needs of the booming internet services industry, market growth has been limited by political and economic constraints unique to China. China’s socialist market economy is still under strict regulations which are imposed by the government. Earlier this year, the government announced a new rule to restrict the dissemination of information online, particularly information disseminated by foreign companies or foreign joint ventures.

Government action has not been wholly negative: in fact, the government has poured cash into entrepreneurship investments. Premier Li Keqiang has recently begun calling for “mass entrepreneurship.” Across the nation, government-offered incentives have flooded the market in the form of investment funds, cash subsidies, and incubator buildings. Zhongguancun, a neighborhood in Beijing known as the “Chinese Silicon Valley,” is a prominent example of the government’s support for entrepreneurship. In addition to enjoying close geographical connection with top universities, national academies and corporate research centers, Zhongguancun companies have benefited from a series of tax exemptions and research subsidies since 1998.

While it is true that the major cities like Beijing and Shanghai have been China’s primary sites for young, prosperous startups, governmental incentives are also moving the action to smaller cities. For instance, Yingtan, a lesser known city in the inland and less economically prosperous province of Jiangxi, plans to launch an incubator company. A unique byproduct of China’s socialist market economy, this level of of government support for entrepreneurship is not seen elsewhere in the world.

As the Chinese government’s economic policy pivots toward innovation, new ideas have poured out as a result. A mature market and fewer restrictions will ensure that these ideas are turned into action. While new tech hubs proliferate, the world waits to see what China will make next.

 

Luwei Xiong is a freshman at Yale University. Contact her at luwei.xiong@yale.edu

 

The opinion in this article is the author’s own. It does not necessarily reflect the view of China Hands.